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Much like a roof over your head, a car can be an indisposable asset/necessity in your life. However, a car costs a lot of money. If you’re like most people, you’ll need to take out a car loan to help you finance such a large purchase. While there may be good deals to be had, there are also countless people out there paying far too much on their monthly car payment. 

Are you one of them? 

Is Your Monthly Car Payment Too Expensive?

If your monthly car payments are too much for you to comfortably afford, they are too expensive. 

Ideally, your car monthly payments and other associated costs with a car (ex: maintenance) should take up no more than 15% of your net income. This will ensure that you have enough money left over to cover other monthly expenses and have some flexibility to use whatever you have remaining on leisurely expenditures.  

For instance, if you earn a net monthly income of $6,000, aim to spend no more than $900 per month on your car.

Reasons Your Monthly Car Payment May Be Too Expensive

High car payments are rather common, and there are a few main reasons why this is the case, including the following.

You Got Stuck With A High-Interest Rate

The terms of your loan can have a big impact on the overall cost of your car. Particularly, the interest rate and term length of the car. High-interest rates and short terms will generate the most expensive monthly car payments. 

As such, it’s important to compare lenders and get pre-approved for a car loan to determine what your car loan payments may look like. This will also allow you to choose a loan offer that is most affordable for you. 

You Bought An Expensive Car 

The higher the MSRP of the car, the higher the loan amount you’ll need, and the higher the monthly car payments will be. No matter how low of an interest rate you get, if the car price tag is out of your budget, your monthly car payments will be too expensive. 

Considering how expensive cars are these days, it’s super important to do a little comparison shopping before you settle on the car that you eventually purchase. Not taking the time to do this research can cost you in the long run in the form of a higher ticket price and bigger monthly payments. 

You Got Pulled Into The “Extra” Features 

Similar to the car price, when you add up all the upgrades that are featured in the car, it could total tens of thousands of dollars on top of the base price. These upgrades will increase the loan amount required to finance the car, which will also increase your monthly payments.

Be sure know what you want and be prepared to negotiate with your dealer

You Didn’t Check Your Credit Score Before Applying For A Car Loan

Your credit score often plays a key role in what your lender is willing to offer you in terms of loan amount and interest rate. The higher your credit score, the more likely you’ll be able to qualify for a low-interest rate. Similarly, a lower credit score could translate into a higher interest rate, which can lead to a higher monthly car payment.

To make sure that you’re getting the best interest rate on your car purchase, find out what your credit score is before you begin the car-shopping process. If time is on your side, take steps to improve your credit score first before you buy a car. Doing so could potentially save you a great deal of money.

How To Build Your Credit To Get Better Car Payment Terms

While there are ways to get bad credit auto financing, you may be better off taking some time to rebuild your credit score to help you secure a lower interest rate and therefore make your auto loan more affordable. Here are some ways that may help improve your credit:

How To Lower Your Monthly Car Payment When It’s Too Expensive?

Whether you already have a car loan and want to reduce your payments, or haven’t yet committed to a car loan, there are a few effective ways to keep your payments affordable.

How To Lower Your Monthly Car Payment Before Buying A Car

The best time to negotiate a lower car loan payment is before you commit to a loan agreement. Keep the following in mind to ensure your car loan payments are as low as possible before signing a contract:

Make A Large Down Payment 

The bigger the down payment, the smaller the loan amount will be. That means lower monthly car payments. When buying a car, try to put down at least 10% to 20% of the purchase price to reduce your payments. This will also shorten the loan term and save you money in interest over the life of the loan.

Increase the Term Length

The longer you have to pay off your loan, the lower your monthly payments will be. Let’s say you take out a $15,000 car loan at a rate of 4.5%. On a 48-month term, your monthly payments would be $342.05. But if you extended the term to 84 months, your payments would dip to $208.5. 

Look at All Car-Related Expenses

At the end of the day, your car payments should fit comfortably within your budget. There are a handful of expenses you’ll need to be familiar with in addition to your car payment when budgeting for a vehicle, including the following:

  • Gas
  • Insurance
  • Maintenance and repair costs

You may be able to keep some of the above costs low. For instance, be mindful of how much you drive every month to keep fuel charges low and to minimize maintenance requirements. When looking into car insurance, choose just enough coverage so you don’t pay for more than what you truly need.  

How To Lower Your Monthly Car Payment After Getting A Car Loan

If you already have a car loan and are looking to lower your existing payments, consider the following options: 

Refinance 

Refinancing involves taking out a new loan and replacing your existing car loan with a new rate and terms. Ideally, the new loan will have a lower interest rate, which will help you pay less in interest overall and reduce your monthly payments as a result. 

Or, you can extend the loan term to stretch out your payments. With more time to repay your loan, your monthly payments will be lower. Just keep in mind that you could wind up paying more in interest over the life of the loan by extending the term, even if your installment payments are lower.

The best time to refinance your car loan is when your credit score and financial situation have improved since you initially took out your car loan, you may qualify for a lower rate and better terms. 

Sell Or Trade In Your Car For A Cheaper One 

If your current monthly car payments are too expensive consider selling your car and buying one with a lower price tag. Or, trade in your car with your dealer for something that fits better within your budget. 

If you’re considering this option, make sure you can sell or trade-in your existing vehicle for enough money to cover your outstanding car loan balance. Find out exactly what you still owe on your loan and how much your car is currently worth before taking this route. 

Other Ways To Lower Your Monthly Car Payment When It Is Too Expensive

Whether you’ve already bought a car or are still in the market shopping for one, there are things you should consider to keep your car payments low:

  • Reduce The Loan Amount  – If you haven’t yet taken out a loan, consider opting for a lower loan amount. Make a bigger down payment or buy a cheaper car to keep your loan amount as low as possible. 
  • Save For Longer – If you can get by without a car for a little while, consider postponing your vehicle purchase to give yourself more time to save up. The more you save, the less you’ll have to borrow, which means lower monthly payments. 
  • Ask The Lender To Defer Your Car Payment – If you’re having trouble paying your car payment and need a short break to recoup your finances, consider deferring your car loan payment. Deferring your loan payments simply means postponing your payments for a short time.
    • The length of loan deferrals usually ranges between 1 to 3 months.
    • Some deferments don’t require any payment at all, while others require the interest to continue to be paid. If you don’t make interest payments during the deferral period, the interest will still continue to accrue, which you will have to pay eventually.

How To Calculate Your Monthly Car Payment? 

The easiest way to calculate the cost of your monthly auto loan payments is to use a car loan calculator. Your payments will depend on the following factors:

  • Car price
  • Down payment
  • Interest rate
  • Loan term

When calculating your car loan payments, consider inputting only the loan amount, rather than the car price and down payment. Your loan amount is simply the price of the vehicle minus the down payment.

Estimate Your Monthly Payments

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Can You Get A Cheaper Monthly Car Payment With Dealership Financing Or Auto Loans? 

When it comes to financing your car, you have some options. 

Dealerships – For starters, dealers will typically offer their own in-house financing to help car buyers finance these big purchases. 

Auto Lenders – There are also auto lenders available who are not affiliated with dealerships, and instead, offer their own loan products to borrowers. You may find this route the better one to take because third-party auto lenders typically have more flexible requirements and financing options. 

Final Thoughts

Ensuring that your car payments fit well within your budget is crucial to maintain healthy finances. If you find that your car payments are too expensive, consider refinancing your car loan for a longer term and lower interest rate, or trade-in your car for a less expensive one. If you haven’t yet taken out a loan, consider making a bigger down payment and giving your credit score a boost to make your loan more affordable.

Adding another bill payment to the books will eat into your income, so before you get yourself into this deal, make sure that the added payments you take on fit well into your current financial situation. 

Monthly Car Payment FAQs

What happens if my car payment is too high?

If your payments are too expensive, you’ll be at risk of falling into debt faster, missing loan payments, defaulting on the loan, and hurting your credit score. This can eventually lead to late payment penalties and even vehicle repossession. If you’re in this situation, take steps right away to lower your payments.

How much should a car payment be?

A good car payment should be no more than 10% to 15% of your income.

How can I calculate my monthly car payment in Canada?

One of the most accurate ways you can calculate your monthly car loan payment is by using a car payment calculator in Canada. With it, you can calculate your monthly payment based on the interest rate, term and loan amount.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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